ECB throttles bond purchases: no price swing despite high inflation

Regardless of the high rate of inflation, the European Central Bank is sticking to its loose monetary policy. She expects inflation to decline in 2022. Many economists believe that the ECB is underestimating the development.

When Martina Peters from Bad Nauheim wanted to book a rental car for her vacation in Mallorca a few weeks ago, she thought she was hit: the price for the vehicle was almost four times as high as normal. The hotel also wanted significantly more from its long-term customer and the flight that had already been booked was more expensive than last year anyway. Overall, the trip cost a good 30 percent more.

The travel industry is one of the industries that is currently driving prices up significantly across Europe – as is the entire service sector. But not only that: petrol and heating oil, a lot of food and increasingly electronic devices are particularly expensive. In addition, the return to the old VAT rates in Germany and the CO2 levy in this country have also increased spending.

ECB considers high inflation to be a temporary phenomenon

Overall, the inflation rate in the euro area rose from 2.2 percent in July to 3.0 percent in August – the highest level in around ten years. The inflation rate in Germany was even higher: it reached the 3.9 percent mark in August and, according to the Deutsche Bundesbank, is heading towards around five percent.

Despite this development, the ECB sees no reason to act. It is true that “the citizens of the euro zone are now clearly feeling the price increase,” admitted ECB President Christine Lagarde at the press conference after the ECB Council meeting. The inflation forecast for this and the next two years has also been raised. Accordingly, it should be 2.2 percent this year. Nevertheless, the monetary authorities believe that this development is only temporary, said Lagarde.

In the coming year, the price increase will decrease again significantly. According to the new ECB forecast, it should then amount to 1.7 percent, drop to 1.5 percent in 2022 – all of this would be within the scope of the self-imposed target of an inflation rate of two percent.

Critics expect higher inflation than in previous years

So far, however, the ECB’s forecasts have rarely been correct. Their models have been far too optimistic for years and usually lag behind real developments. More and more critics are speaking out. They point out that Corona is permanently changing the global economic structure and that it is precisely this effect that will result in higher price increases in the future.

“I assume that we will see on average higher inflation rates in the next few years than was the case in the past,” says Carsten Mumm, chief economist at the Hamburg-based private bank Donner & Reuschel. “At least over two percent. And at times it could be significantly higher.” Carsten Brzeski, Chief Economist Germany at ING Bank in Frankfurt am Main, also believes that the times of low inflation are over for the time being: “The rates will go down again,” said Brzeski, “but not to the old level”.

Many factors act as price drivers

There are numerous reasons for these expectations: Many companies no longer want to be dependent on deliveries from the Far East and are looking for alternative suppliers who produce in Europe or Germany. This is often much more expensive and should keep prices high. The climate debate is also developing into a price driver. The CO2 taxes, but also other climate protection measures, will continue to drive energy prices up in the coming years. “The fight against climate change will not be free,” says Brzeski.

In addition, the high inflation is also causing wages to continue to rise. The unions are already flexing their muscles. In many European countries, wage developments are automatically linked to the inflation rate. In Spain, for example, wage rounds of up to seven percent are currently not uncommon. All of this leads to more consumption, but also to higher inflation. Many observers fear a wage-price spiral like in the 1970s and accuse the ECB of not adequately incorporating these developments into its models.

In fact, ECB President Christine Lagarde left a back door open and stressed that the ECB would have to readjust its inflation forecasts if these developments drive prices up more than currently expected.

“The lady is not for tapering”

Overall, however, the central bank is sticking to its ultra-loose monetary policy – even if it is now slowing down the speed with which it buys bonds as part of the PEPP corona emergency program. According to Lagarde, this is not a sign of a change of direction. “The lady is not for tapering,” said the ECB President. The measure is therefore not a starting signal for shutting down the program.

The central bankers are cautious: they fear that tightening them too quickly – that is, a slowdown in bond purchases and a possible rise in interest rates – could put many European countries in trouble if they want to get fresh money. In the worst case, this could lead to turbulence in the financial markets. And the monetary authorities want to prevent that at all costs.

Consumers who have their money in their savings account continue to be the losers of this monetary policy. Because this monetary policy also means: A turnaround in interest rates is no longer in sight.